The Devil's Casino_ Friendship, Betrayal - Vicky Ward [66]
And Dick, that would be you."
From then on, Freidheim called Fuld Ntwadumela whenever he could. And Fuld loved it.
Freidheim rose to become one of Fuld's most trusted confidants. Ten years later, he'd give
Fuld a bust of a lion to put on his mantel.
The fact that Lehman's strength was in fixed income--namely as a bond shop--now
worked to its advantage. Wall Street was slowly being taken over by capital markets
guys: the same guys advisory bankers of yore had looked down their noses at. By the mid
-1990s, Morgan Stanley (where John Mack was president), Goldman Sachs ( Jon
Corzine), and Lehman Brothers (Fuld) were all led by men who had started in capital
markets. The high-stakes gamblers were now in charge of the casino.
"This was the time that people's balance sheets grew significantly," says Bob Steel, a
retired vice chair of Goldman Sachs and former undersecretary of the U.S. Treasury. "I
don't believe these things are accidents."
Leverage became an important word. So did mortgages. As the housing market grew,
mortgage-backed securities became the devil's dice--and no one was more aggressive in
this field than Lehman, under the leadership of its longtime real estate guru, Mark Walsh.
"Walsh had a lot of credibility because he had a very good long-term track record
investing in commercial real estate," John Cecil says. "And so when Dick and others
decided to improve firm performance even further, by taking proprietary risk, he was one
of the guys that they wanted to see go . . . and he did. Ramping up to the end, you
probably see a rapid growth of the assets under Mark's control."
In 2000, Fuld rewarded Walsh for all the money he had been making in real estate by
naming him co-head of a new private equity group that invested in real estate. Walsh
raised $1.6 billion in pension funds and delivered an internal rate of return of more than
30 percent over the next few years. He raised $2.4 billion for a second fund, which
generated 15 percent until it closed in 2005. Lehman owned just 20 percent of the funds,
but if outside investors passed on a deal, the fund managers could use Lehman money.
If they won--and until 2006 they were winning big--they got huge bonuses. Walsh's
commercial real estate department was not the only one to rise within Lehman. So too did
the residential housing, namely mortgages--which Lehman both originated and
securitized (that is, diced up and sold off as financial pieces to clients) under its fixed
income group. It was so prolific in this area that a senior member of the Federal Reserve
would later say, "A lot of people thought of Lehman as a bond shop; but really it became
a mortgage shop."
Lehman was slowly transforming itself from an operation that survived deal to deal into a
more streamlined, multifaceted shop. In 1999 it lead-managed Qualcomm's $1.1 billion
initial public offering (IPO); served as Olivetti's adviser in the $34 billion acquisition of
Telecom Italia--later hailed by The Banker magazine as "the deal of the year"; advised
MediaOne in its $63 billion merger with AT&T ( Institutional Investor's M&A deal of
the year); and assisted US West in its $48 billion deal with Qwest Communications. The
firm was also an adviser to Honeywell International in the acquisition of Pittway
Corporation--the deal of the year for Investment Dealers' Digest.
That year Lehman also announced an agreement with Fidelity Investments to offer its
research and a host of products to the company, a leading force in the mutual fund
industry. It acquired Delaware Savings Bank to leverage online technology by providing
a consumer bank. In 2000, to bolster one of its top moneymaking divisions, Lehman
hired ex-Salomon Chief Equity Strategist David Shulman as the senior real estate
investment trust (REIT) analyst.
On the UK banking side it hired John Williams, the sought-after investment banker who
led the demutualization of Abbey National--transforming it into a joint stock company-and was an adviser to National Westminster Bank. It also hired